Investor Toolkit

Here's what you shouldn't do during stock market volatility

Key Points
  • While precipitous market swings may put the Dow Jones Industrial Average in correction territory, financial experts say these kinds of moves are the sign of a healthy market.
  • Pause before you panic and evaluate your short- and long-term goals, experts say. Make sure your investment mix matches what you want to achieve.
Tom Fowlks | Getty Images

You may be tempted to move your investments to cash in light of the more than 1,100 point-drop the Dow Jones industrial average suffered in one day that put the index in correction territory.

Yet financial advisors say you shouldn't let this development spook you from staying the course when it comes to your investment goals.

"This is very healthy," said financial advisor Paul Pagnato, founder and CEO of PagnatoKarp in Reston, Virginia, noting that the long-term outlook for the economy, market sentiment and world stability remains the same. "We're long overdue for a market correction," he said.

The Dow erased its 2018 gains on Monday, dropping 1,275.21 points to 24,345.75. The also suffered a big one-day decline, closing at 2,648.94.

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While those numbers look stark, it's important to put them in the context of how far the market has climbed, said Scott Hanson, founder and senior partner at Hanson McClain Advisors in Sacramento, California.

A 250-point drop for the Dow today is only about a 1 percent decline, Hanson said. But that same drop when the Dow was at 10,000 would have been a 2.5 percent fall.

At the same time, there's usually a 10 percent dip at some point every year, Hanson noted. It has been two years since we have seen such a decline.

But if the sight of your account balances still makes you queasy, here's what you need to remember.

Don't forget your time horizon

Think of your investments in terms of near-term and long-term goals. For short-term goals that you want to achieve in five years or less, your investments should not be concentrated in stocks. For long-term goals that are 10, 20 or 30 years out, you do want to take on more risk.

So if you're looking to buy an apartment or house in the next two to four years, you want to have that savings in cash, said financial advisor Roger Ma, founder at Lifelaidout in New York.

If you're saving for retirement in your 401(k) or individual retirement account for the long-term, chances are you can afford more exposure.

"Investing in stocks rewards you in the long term," Ma said. "These day-to-day changes in the market shouldn't affect you."

If you're close to retirement, however, you do want to have more conservative investments, said Winnie Sun, founder of Sun Group Wealth Partners in Irvine, California. That could include an insurance product such as an annuity, which comes with higher fees, but can help curb market risks, she said.

Don't make sudden moves

If you're set on getting into or out of the market, don't do it all at once, Pagnato said.

Instead, use a strategy called dollar cost averaging, whereby you buy an investment on a fixed schedule. That should occur at a minimum over a six-month period in three or four tranches, according to Pagnato. So you would put a third of your money in now, another third in three months and another third in six months, for example.

As long as you have a good plan in place and have thought about the time horizons where you need the money, then the slightly small moves in the market shouldn't matter to you.
Roger Ma
founder at Lifelaidout

If you're looking to get out of the market, you also want to use the same strategy to sell, said Pagnato of PagnatoKarp.

By moving gradually, you can pace your investments and evaluate how well your moves are working.

Don't forget the big picture

Keep in mind that investments are just one part of your overall financial plan, said Ma at Lifelaidout.

Your financial health also depends on other factors, particularly what you are earning and spending, including your expenses.

"As long as you have a good plan in place and have thought about the time horizons where you need the money, then the slightly small moves in the market shouldn't matter to you," Ma said.

If you're still uncertain, then it's time to consult a professional, according to Sun of Sun Group Wealth Partners.

"If you're nervous and if you're losing sleep, you need to get yourself to a financial expert to partner up with before making any drastic moves," Sun said.